How important is it for your GC to be licensed and insured?
Decatur, GA · Member since 2015 · 423 posts · 53 votes
Today is my last day of due diligence on my first flip property. My real estate agent referred me to an experienced GC. I like him and am confident he is reliable enough and would do good work, but I found out today that he is not licensed (previous license expired) or insured. Also, some of his subcontractors are not residing here legally. Is this an obvious no go on this contractor? If so, do others here (I'm in Atlanta) have good GC's they can recommend? I am also wondering if I could have a lawyer draft a waiver to eliminate any of my liability for accidents and what not on the job.
If you're hiring work that needs a license, get a licensed contractor. Your liability is enormous and no amount of waiver will waive away your responsibility for accidents or other problems... not to mention that without a license, you won't be getting permits... which exposes you to a whole lot of potential mess.
Shame on your agent for recommending an unlicensed contractor. I bet the agent would be livid if someone recommended an unlicensed individual practicing real estate.
... and on that note, if your quotes to date have only come from contractors that the agent recommended, you need to find a way to extend your diligence and get third party opinions. There's a number of very shady agent/wholesalers in Atlanta who have sucker punched more than one new investor by selling them property predicated on repair estimates coming from contractors that the agent controls.
@Aaron McGinnisI started renovating homes at the age of 14 yrs old with a friend of the family. Guess I violated labor laws as well? When 21 yrs old, I started handling my own projects. I've installed flooring for clients that cost well over $2,500. In December 2015, I completed a vinyl siding job that cost the client $4,700. I could go on and on but fact is not all investors are turning to GC every time they need work done outside of electrical, plumbing, and HVAC. Even with these three services, a General Contractor isn't needed if you have a licensed, electrician, plummer, and HVAC technician doing the job.
Also I'm very familiar with State Law Requirements and yes you are correct. Work exceeding $2,500 does require a GC. But many of us know cheaper alternate ways to get the job done with the same results other then hiring a GC who's only going to hire others to paint walls in a house, put floors down, then combine the "two" jobs into "one" invoice exceeding $2,500.
Well... yes, actually. You were violating labor laws, and your friend opened himself up to a lot of legal danger. Imagine if one of his other employees had a gripe with him and threatened to report him. Or if you had gotten hurt and ended up in the hospital. Just because you can do a thing doesn't mean it's a good idea.
My best analogy to these things is - I CAN drive 100mph in a school zone while chugging a bottle of vodka. That doesn't mean that it isn't illegal and dangerous to do so.
And if you're doing more than one mechanical at the same time in a house, you do need a general building permit... which means you need a licensed contractor to do the work.
I'm terribly sorry that you don't like the laws. I agree that in some cases they are draconian and somewhat nonsensical (Roofers especially are a grey area that just sort of gets ignored in Georgia)... but the law is the law, and anyone who is going to break the law needs to at least understand what law they're breaking and what the potential ramifications are.
What are the pre qualification to obtain a GC license in your state?
In PA it requires one to fill out a form and provide the $50 application fee. Quite disheartening when I found that out.
I would absolutely require the GC to have liability and workmans comp insurance.
In Georgia you have to take a test and prove a certain net worth, plus carry applicable insurance and have a certain number of continuing education hours every year of licensure. It's actually a pretty thorough pain in the butt. The Georgia Secretary of State website has all the details.
Ok, here is what MINE covers:
Commercial General Liability covers things that are on site, material wise, mine covers vandalism, fire, break ins, etc
Material Floater Insurance covers materials stolen from my work sites (not sure if you as investor/owner can get this)
Worker's Compensation Insurance covers things that are manpower related. Work accidents, injury, death, electrocution, etc.
Contractor's Bond covers mostly all workmanship defects and MAYBE non/under payments to subs/suppliers, our state only requires only 15k, so I did not really even bother to ask my agent what it covers because I have way better. In MY particular case (and I don't see this on residential and light commercial projects), Payment bonds cover anything that I don't pay (subcontractors who performed the job, or suppliers that supplied materials to me on credit) in the performance of the project, Performance Bonds covers anything that I don't do/finish a contract (ie. If I had a contract to install a new roof, and I only demo the roof then got an argument with the client because we need to change 80% of the sheeting and did not specify that I only budgeted for 10%, then I walk away on the job, the client can hire someone else and go after the Performance Bond).
Excess Policy/Insurance covers all the damages which will exceed all my policies/insurances, say someone sues me for 1.5M and my policy only covers 1M, this covers it.
On my statement where I said having a licensed and insured contractor is not enough, is because all my subs are licensed, bonded, and insured. And even that is not good enough for me, they have to name our company, our client's and its officers and the address of the work site under a Waiver of Subrogation, meaning that if something and everything that is going to happen in the worksite, regardless of who's fault it is, we are not liable.
Thank you @Manolo D. though I seem to be getting further and further from a clear path forward. Other than the waiver these are all items contained within the standard contractor insurance? Or are these policies that you the investor are supposed to take out? And again are they bundled together or do they need to be obtained individually?
@Nick Brubaker These are contractor obtained insurances/policies, I am sure more than half of the residential contractors don't have these extensive. As an investor, you have the options to pick and choose which one's you need/want. Just because I have all these does not mean that I am good at my work, nor does it guarantee that I finish a contract, however, it only certifies that I am fully covering all of my client's needs and they have are substantially have lesser risk in hiring us, just because my client "require" it. On the other side of the coin, we have to charge more because we need to recoup our expenses, for us, the things I mentioned translates to 20k/year. I don't think these are "standard insurance" for residential transactions, however, they are standard for the clients we serve. I am expressing what we do, it is up to you on what "degree" of risk you are willing to take, someone with these coverage is likely to cover yourself at 95% on all damages/faults/walk aways, while hiring an unlicensed tradesperson will cover you 5% on all damages/faults/consumer protection. You can simply protect yourself at the contractor level, once you do that, you can accept/need not question any subs, suppliers, or employees they will be using, however, there are further steps and paperwork you will need from them when cutting that check, such as supplier/subcontractor unconditional waiver of lien release and such.
Thanks @Manolo D. That's a lot to consider, but I'm learning.
@Nick Brubaker Just so you know, we do have flexibility also, like for a flagpole job we installed, there are only a handful of company that services that county, the one I chose does not qualify for bonding, and has a substandard WC/GL coverage (only 500k single occurrence and 1M aggregate) on both, I require twice that most of the time (95%), but I need to get the job done on a timely fashion and on the right price. After evaluating my risk, and how likely an accident will occur, I hired them, however, I will not take that risk on a foundation of a 3 story job that will house 100 people, and will require 2 times of what my standard coverage requirement.
Some thoughts that came out of my passive investor meetup last night in Seattle:
Although you get work done at 30% of the of the licensed bonded insured market price also include a few items..
+20% for the warranty (if it breaks good luck trying to get them to remediate the situation) +20% for the workers comp and liability risk fact - will you be able to submit paperwork saying you were not in negligence if someone got hurt due to faulty or non faulty work..
+25% I am assuming you are not sending them a w9 and therefore not getting the tax deduction
30+20+20+25=95%
Is it really worth it when you evaluate the issue holistically?
*I know the math is funny and I commend you for seeing through the funny data analysis but you get the point
Thank you @Michael Hayworthand @Ned Carey. So while you both are saying a license may not be necessary, is it still critical that the contractor be insured?
I am saying
The choice is not a simple question and you have to weigh the risks, costs and benefits.
From what I've read, if you are doing cosmetic things, there is no need for a licensed contractor, but if you are doing things like wiring or structural work, the GC should be licensed.
@Jeremey Allen So what happens if someone is doing exterior "paint", falls down, and breaks his leg and will not be able to work for a year? His contingency attorney checks your assets, you have 1 house with 100k equity, 2 fully paid cars, sues you for 150k. You spend what, 5k for the defense? 70k for the settlement? So you could escape paying 1k more?
@Jeremey Allen So what happens if someone is doing exterior "paint", falls down, and breaks his leg and will not be able to work for a year? His contingency attorney checks your assets, you have 1 house with 100k equity, 2 fully paid cars, sues you for 150k. You spend what, 5k for the defense? 70k for the settlement? So you could escape paying 1k more?
I do all my own cosmetic work so I don't know. But you do bring up a good point. Hopefully someone more knowledgeable on the subject will chime in.
@Nick Brubaker, having insurance and having a bond are different things. Insurance has limits of liabilities in numbers like 2 million dollars in coverage if the contractor does something wrong. A bond is in the neighborhood of 6-10k for payment if you don't perform. This can be attached by suppliers or offices of states for taxes and such.
Thanks @Tom Pritchett. Did quite understand you last sentence though. Are most licensed contractors also insured AND bonded?
Thanks @Tom Pritchett. Did quite understand you last sentence though. Are most licensed contractors also insured AND bonded?
In Georgia, the answer is... if you're licensed, you HAVE to carry the legally applicable insurance and a bond. It's part of the licensing requirement.
@Nick Brubaker, yes, as was said by @Aaron McGinnis, to have a current contractor license, one must have a bond as well. Different states may have different requirements of liability levels, but the framework seems to be the same.
There is a lot of great information on this thread. I think that the general consensus is that you need to hire a contractor with all of the right documentation and liabilities. This is to protect you and your contractor.
Thank you all for this. I have managed to get estimates from a couple licensed contractors, which are coming in close to my initial estimate. Due diligence on my first property ends in a couple hours and I'm feeling good about it.
Just understand that if they are insured, they are automatically bonded.. It goes hand in hand. @Nick Brubaker. If they aren't insured, I don't mess with them at all. Unless! they have workers comp as a handyman.. Then we can talk.. And I'll only use them if we're short on time or my GC need someone extra for a specific job.
It is critical for them to be insured because if they aren't, then you're a lawsuit waiting to happen.
Just understand that if they are insured, they are automatically bonded.. It goes hand in hand. @Nick Brubaker.
This is not correct. A bond is not an insurance policy and an insurance policy is not a bond. They are separate issues entirely.
I have had my share of bad contractors. That said, I will answer your question in the context of doing a fix and flip.
Once your house is rehabbed, completed and put on the market and you have a buyer that is using a bank to finance the purchase, usually some third parties will get involved in the due diligence.
Depending on what the bank requires, this may include an appraiser, a home inspector, a termite/pest inspector, a structural inspector, title company etc. If these third parties are doing their job properly, they will prepare reports for the bank and note that the house has had recent improvements.
If they are really diligent, regarding checking out the recent improvements or if the underwriter requires it, they will check with the building department in the jurisdiction to see if permits were pulled to do the work. They will also check to see if inspections tied to the permits were done by the building department and if they passed or failed the inspection/s and if the work was done in accordance with the local building codes (which is what the inspections are for).
In my area, a contractor who is not licensed, insured and bonded cannot pull a building permit. That may not be the case in other jurisdictions so there may be exceptions.
If you hire a contractor who is not licensed, bonded and insured, it means that the work will be done without a building permit. That means the work will not be inspected, which in turn means that the work may or may not have been done to code. If the underwriter finds this out, you can pretty much kiss your deal good bye. There is too much liability for the bank to be willing to proceed and lend your buyer money on a property that does not have the proper paper trail of renovations. Even if the contractor did an excellent job and everything was up to code, the fact that he was not licensed, bonded and insured and thus had to circumvent the proper channels may very well come back to bite you especially with a bank financed buyer or any other savvy buyer who can do their homework.
This is a BIG DEAL because the building department may not be willing to back track and issue you permits on work and do inspections on work that has already been done without a permit (especially if it is work that is covered up already e.g. electrical wiring already covered up by insulation and drywall). They would either stop the work, demand that you demo the work and start over and/or refuse to issue a certificate of occupancy until the issue is corrected.
That said, just because a contractor is licensed, bonded and insured does not mean that they will do a good job or that they may even know what they are doing. Some jurisdictions make it ridiculously easy to get a GC license. Electrical, Plumbing and HVAC licenses are usually in a different category that will make the applicant take some trade courses and pass exams, but just because an electrician, a plumber or a HVAC guy is licensed does not mean that they will do a good job or that they know what they are doing.
Bottom line, really check out your contractors to make sure they are experienced and that they have a good track record. Licensing, bonding and insurance on a contractor does not necessarily mean they are experienced and that they will do a good job, it means that they can follow the proper channels in your jurisdiction, some liability is covered and that you may have some recourse if things go wrong.
This is super helpful and informative @Account Closed. Thank you for taking the time. I found a GC who is a licensed Freddie Mac general contractor. So, I'm pretty sure the credentials are there. I just need to be sure the quality of work is acceptable and am doing this by checking out some of his photos and properties and will contact a couple of his past clients.
You are welcome. Lessons from the trenches that I do not mind passing along. I would also schedule some on site job visits with the contractors you are vetting to see how a job in progress looks like.
If you want to take it to the next level in vetting your contractors and be a Ninja at it, get to know your building department and the people that work there. Yes you may be able to call or get info online but you owe it to yourself to get down there physically and establish a relationship......especially with the clerks.....then when you call, they know who you are and they are glad to help you.
The Clerk can look up contractors for you to see if they are licensed, bonded, and insured, how long they have been in the system, any lapses in licensing, bonding and insurance, any specific permits pulled, any complaints against their work which would include fines, stop work orders etc. There is a lot of investigative work you can do to at the building department to weed out many of the bad apples. Some trades (e.g. plumbing in my State) operate on a State issued license so you can check their license status at your State level Professional Licensing Agency. Whatever the trade, though, they all have to pull permits on the local level and you can find out a lot about them over the counter at the Building Department (depending on how much info is available without getting to the point that it requires a formal request through the legal dept).
Also, if a contractor tells you they did some work at 123 Main Street or any other address, you can look it up at the Building Department and see if they pulled a permit and dig in as deep as they will let you go.
The other thing about Building Departments that you need to know is that the regulations may be different from jurisdiction to jurisdiction and you need to know what the rules are for the jurisdiction you are working in to avoid getting yourself in trouble. For example, one jurisdiction may require HVAC work to be done by a licensed technician who has to pull a permit...another may not.
My opinion is that a good number of contractors do not know or do not check with their jurisdiction to see what needs to be done to be in compliance. Some probably just do not care. You cannot assume that they know. Educate yourself so you can check them early in the game.
I know that everyday, there are loads of contractors who are not licensed, bonded or insured that are doing business as usual. These guys can keep their prices low since they are under the radar. Some of them do excellent work because they know what they are doing and they have years of experience. Others are crooks preying on those that do not know any better.
A contractor who has both sides covered...licensing, bonding and insurance as well as experience, knowledge and a track record will charge a premium.
Great tips @Account Closed. Thanks!